Managerial Accounting Test 2

Front 1

IRR df =

Back 1

Investment / Annual Cash flows

Front 2

Internal Rate of Return

Back 2

Interest Rate that sets the present value of project's cash inflows equal present value of project's costs

Front 3

Required Rate of Return

Back 3

Minimum acceptable rate of return. Also referred to as the discount rate, hurdle rate, and cost of capital.

Front 4

Net Present Value (NPV)

Back 4

Difference between the present value of cash inflows and outflows associated with a project.

Front 5

Accounting Rate of Return

Back 5

Average Income / Original Investment or Average Investment

Average Investment = (Original Investment + Salvage Value) / 2

Front 6

Discounted Cash Flows

Back 6

Future cash flows expressed in terms of their present value

Front 7

Operating Leverage

Back 7

Use of fixed costs to extract higher percentage changes in profit as sales activity changes.

Front 8

Price Discrimination

Back 8

Charging different customers different prices.

Allowable if:
1. Situation demands it
2. If costs can justify lower price

Front 9

Linear Programming

Back 9

Method that searches among possible solutions until it finds the optimal solution

Front 10

Margin of Safety

Back 10

Units sold or expected to be sold above break-even volume

Front 11

Sales Mix

Back 11

Relative combination of products being sold by a firm

Front 12

Degree of Leverage

Back 12

Contribution Margin / Profit

Front 13

Mark up

Back 13

Percentage applied to base costs

Front 14

Sunk costs

Back 14

Past Costs

Front 15

Making Tactical Decisions

Back 15

1. Recognize and define problem
2. Identify alternatives
3. Identify cost/benefit of each alternative
4. Total relevant cost/benefit
5. Asses qualitative factors
6. Select alternative with the greatest cost/benefit

Front 16

Dumping

Back 16

Predatory pricing on international markets

Front 17

Strategic Decision Making

Back 17

Select among alternative strategies so that the long term competitive advantage is established

Front 18

Contribution Margin Ratio

Back 18

Proportion of each sales dollar available to cover fixed costs and provide for profit

Front 19

Tactical Decision Making

Back 19

Changing among alternatives with an immediate or limited end in veiw

Front 20

Contribution Margin

Back 20

Sales revenue - Total variable cost

Front 21

Variable cost ratio

Back 21

Proportion of each sales dollar that must be used to cover variable costs

Front 22

Net Income =

Back 22

Operating Income - Taxes

or

Operating Income = (Net Income) / (1 - tax rate)

Front 23

Break Even (Units)

Back 23

Fixed Costs / Unit Contribution Margin

Front 24

Relevant Costs

Back 24

Future costs that differ across alternatives

Front 25

Complementary Effects

Back 25

When an item(s) effects sale of other items. For ex: dropping one item will reduce sales of another.

Front 26

Break Even (Sales)

Back 26

Fixed Costs / Contribution Margin Ratio

Front 27

Direct Fixed Expenses

Back 27

Fixed costs that can be traced to each product and would be avoided if the product did not exist.

Front 28

Target Costing

Back 28

Method of determining cost of products or service based on the price (target price) that customers are willing to pay.

Front 29

Change in resource spending may occur in one of two ways:

Back 29

1. Demand exceeds supply

2. Demand drops permanently and supply exceeds demand enough so that activity capacity may be reduced

Front 30

Price Gouging

Back 30

Firms with markets price items too high

Front 31

Capital Investment Decisions

Back 31

Process of planning long, setting goals and priorities, arranging financing and using certain criteria to select long term assets

Front 32

Capital Budgeting

Back 32

Process of making capital investment decisions

Front 33

Independent decisions

Back 33

Projects that do not affect cash flow of other projects

Front 34

Mutually exclusive projects

Back 34

Projects that if selected, preclude selection of all other projects

Front 35

Non discounting models ignore time value of money

Back 35

Discounting models consider it

Front 36

Pay back period = Original Investment / Annual Cash Flow

Back 36

The time required for a firm to recover its original investment.

Front 37

Pay back period discrepancies

Back 37

1. Ignores time value of money

2. Ignores performance of investment beyond payback period

Front 38

Pay back period

Back 38

1. Helps control risks associated with uncertainty of future cash flows

2. Helps to minimize the impact of an investment on a firm's liquidity problems

3. Helps control risks

Front 39

Accounting Rate of Return

Back 39

Measures the return on a project in terms of income, as opposed to using a project's cash flow

Front 40

Capital Investments should earn back their original capital outlay

Back 40

To make capital investment decisions, a manager must:

1. estimate the quantity and timing of cash flows

2. assess the risk of the investment

3. consider the impact of investment on the firm's profits

4. select investments with positive NPV

Front 41

Accounting rate of return considers the profitability of a project beyond the payback period.

Back 41

Payback period doesn't.

Front 42

Positive NPV signifies:

1. Initial Investment has been recovered

2. Required rate of return has been earned

Back 42

Net present value measures:

1. Profitability of an investment

2. Change in wealth

3. Change in a firm's value

4. Difference in present value of cash inflows and outflows

Front 43

Net present value calculated using

Back 43

required rate of return

Front 44

Theory of Constraints

Back 44

Exploit in short run, overcome in the long run

Front 45

Throughput

Back 45

Rate at which an organization generates money through sales

= Contribution Margin

Front 46

Inventory

Back 46

All money organization spends in turning material into throughput

Front 47

Operating expenses

Back 47

All money an organization uses in turning inventory into throughput

Front 48

Sensitivity Analysis

Back 48

Most likely, most optimistic, most pessimistic

Front 49

Reorder Point

Back 49

Rate of Usage X Lead time

Front 50

Just In Time

Back 50

Pull through system (Demand pull)
Insignificant Inventories
Small supplier base
Long-term supplier contracts
Cellular structure
Multi-skilled labor
Decentralized services
High employee involvement
Facilitating management style
Total quality control
Direct tracing dominates (product costing)

Front 51

Traditional

Back 51

Push through system
Significant inventories
Large supplier base
Short term supplier contracts
Departmental Structure
Specialized labor
Centralized services
Low employee involvement
Supervisory management style
Acceptable quality level
Driver tracing dominates